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Many branches blamed
Despite the reassurance, Nakumatt’s business is now under close scrutiny. From opening its first outlet in Kampala city in 2009, Nakumatt now has nine branches mainly in the central region. It has two branches in Bugolobi, a small city suburb. It has a big store at Oasis Mall in town, and at Acacia Mall in Kololo, and in Nalya. It also has smaller outlets in Bukoto and Katwe.
The many branches, sometimes next to each other, are seen as an indication that Nakumatta could have poor research prior to setting up its operation. The customer base in Uganda is said to be too small to support the many branches.
“Nakumatt has been setting-up so many branches that are close to each other leading to a reduction in profitability and cash flow amidst high costs of rent,” one observer told The Independent.
But George Mulindwa, a portfolio manager at Stanlib Uganda, an asset management firm, says despite the current challenges facing the retail segment especially with regard to slowdown in the economy, retail chain business is projected to register growth in the coming years albeit at slower pace.
“We have a growing population, growing middle class…every year more people join employment than those that leave…that means at a basic level the demand for milk, sugar, bread, and other household essentials is increasing,” he said.
Spending on groceries has risen over the past years as population of the middle class surges, according to latest statistics on the retail segment by US-based research firm, Research and Markets.
According to the research firm, Uganda’s per capita spending on grocery has risen only slightly since 2011, reaching $156.3 per capita in 2015. This is nearly double per capita spending in 2004.
The research adds that the prospect of major oil revenues in the western region will shift the Kampala-centric investment in modern retail to far-flung upcountry towns like Kasese, Masindi, Arua and Fort Portal.
Mulindwa says to maximize benefits, retail chains need to research prior to setting up new branches to avoid cases of ‘cannibalism’ that encroach on profitability.
Opening more branches appears to be the Nakumatt model. It opened its first branch outside the Kenyan market in 2008 in Rwanda where it now boasts two branches. In 2011 it opened its first branch in Tanzania where it now owns five branches. It also plans to venture into Burundi and South Sudan in the next two to three years.
Whereas more branches could easily contribute to market saturation by Nakumatt at the expense of other retailers, its financing model is being cited as a problem.
The family-owned retail business has successfully relied on a commercial debt financing model to finance the expansion but it could have become unsustainable.
Over the years, Nakumatt has seen its commercial debt, which stood at $150 million at the start of 2015, rise from $42 million at the end of 2011.
Finally, according to management, Nakumatt is in search of an equity investor instead.
Shah said they are engaging a number of local and international financiers who have expressed an interest in providing financing facilities to bridge gaps in cash flow. The plan is for the retailer to cede up to 25% of its shares to an equity investor. It is not clear how the current misstep will affect these plans.
